Buying a house is one of the biggest/most expensive purchases for most of us.
You may lack the funds required to make a purchase even when property prices remain stable or fall. As we all say one has to strip naked financially in order to buy a house and in such a situation the thought of breaking your EPF investment may come across your mind.
But is funding your house using EPF a good idea? Let's discuss it
Firstly, let us understand the withdrawal rules of EPF
You are allowed to withdraw EPF accumulations to make down payments to buy a house or for paying EMIs of a home loan. Let us understand it individually:
For Purchasing or constructing a New House-
- In accordance with Section 68B of The Employees’ Provident Funds Scheme, 1952 (‘EPF Scheme’), you can withdraw: 24 months of basic salary plus dearness allowance (DA) or actual cost of the plot - whichever is lower
- For this, you should contribute in your EPF account for at least five years.
- The minimum balance in the EPF should be INR 20,000, either individually, or together with your spouse, if he/she is also a member of EPFO.
- The house in question should be in your name or jointly with your spouse.
- You would need a letter of authorization from your employer for PF withdrawal if you have not verified your Aadhar Card.
For Repaying Home Loan-
- For the purpose of repaying the outstanding home loan, the PF member is allowed to withdraw up to 90% of the corpus if the house is registered in his or her name or held jointly.
- For this, you should have at least three years of service after opening the EPF account.
- If PF/EPF withdrawal is done before 5 years of opening the account, then the amount is taxable.
The provident fund scheme allows you to withdraw funds, only up to 36 months of your basic salary plus DA for any of the above purposes. Also, you can withdraw from it only once in your lifetime.
Does breaking EPF for buying a house make sense from your entire financial planning perspective?
EPF is an opportunity to accumulate money for the post-retirement period. You keep contributing a small fraction of your salary to the EPF and your employer matches your contribution. As the salary increases, the contributions do go up. That makes a large corpus in your hand for your retirement, provided you do not withdraw it for any other purpose. You let the magic of compounding work for you by investing regularly and consistently in your EPF corpus.
For example, an EPF contribution of 16,000 per month from the age of 25 - increasing at 10% per annum would become a corpus of INR 3.27 crore on retirement. Now, if you withdraw 90% of the corpus at 30 i.e. INR 17.1 lakhs amount. At 60, your corpus will only be INR 2.29 crore.
You are reducing your actual retirement corpus by INR 98 lakhs approx.
Hence, you should not withdraw your investment from EPF before its maturity as this could jeopardize your retirement by exposing you to the risk of leaving no funds/reduced funds for your retired life. Remember, no one will give you a loan for your retirement but for a home, you can manage.
We do understand that a house is a necessity and in the Indian context ‘owned house’ is a social and psychological need for many of us. But, short-term thinking’ focused on immediate gratification must be avoided at any cost.
How to arrange for the downpayment of your house?
It is better to make a plan for home buying. Start saving money to accumulate the down payment amount over three to five years. If the home prices go up or your investments yield less than expected, you may want to delay the home buying by a year or two. Avail of the home loan after you make the down payment but do not touch your EPF money. That is your retirement security.
Wealth Cafe Advice
Do not break your one goal to achieve another. Especially when it is the retirement goal. Do not break your EPF for home buying, unless you have other means to secure your retirement. Plan ahead and plan properly.
Check our course - Money & Makaan - to learn to plan for home buying